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New financing option on runway as Air Canada eyes fleet buy

A person walks by Air Canada planes at Toronto Pearson Airport in this file photo.


Air Canada is moving toward a cheaper form of financing, new to Canadian airlines, in order to purchase long-haul Boeing 777 jets worth hundreds of millions of dollars.

To explore this and other debt options, however, the airline had to make the unusual move Monday of publicly releasing a preview of its quarterly earnings, as required by securities laws.

While cautioning that while the first-quarter numbers were preliminary and unaudited, Air Canada announced that it had an operating loss of around $106-million in the first quarter of 2013, compared with a loss of $91-million in the same period last year.

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Bad winter weather was the main reason. The airline was hit with an estimated $10-million in costs associated with cancelled flights and delays because of weather, in addition to de-icing delays at Toronto Pearson International Airport. Other factors included a higher number of leisure travellers and fewer higher-paying business passengers, along with unfavourable exchange rates.

Air Canada has for months been dropping hints that it is interested in tapping into what's known as the enhanced equipment trust certificate (EETC) market. This debt is a new option for Canadian airlines since the federal government supported legislation back in October to allow this form of debt for financing aircraft.

The EETC market protects collateral internationally and therefore reduces the risk to lenders. This in turn helps to lower the extra premium put on riskier debt and makes it a possibly less expensive and attractive option for Air Canada. Yet to proceed, the airline had to release its quarterly earnings less than two weeks ahead of schedule.

As analyst Walter Spracklin of RBC Dominion Securities notes, Air Canada "is particularly vulnerable to negative surprises."

But the bigger question was why Air Canada couldn't wait a few more days until the scheduled release of the quarterly report on May 3. Company watchers said this suggests that Air Canada is far along in the process of securing new loans for the five Boeing 777s, each with a sticker price of roughly a quarter of a billion dollars.

"All of this should come as absolutely no surprise to anyone who follows the company," said Chris Murray, an analyst at PI Financial.

In October, Air Canada praised the new option of EETC debt, "aimed at providing means for airlines to achieve savings on financing aircraft," the company said at the time. The EETC protocol allows for clearer rules for purchasing and leasing airplanes and equipment across borders, adding a degree of certainty to international deals.

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"Financiers are therefore able to reduce risk premiums and offer more favourable lending rates, which in turn would result in significant cost savings for the Canadian aviation industry," the airline added.

The EETC market "has been one of the primary capital sources for U.S. domiciled airlines for almost two decades, and is now available to Canadian airlines to fund purchases of aircraft," Mr. Murray wrote in a recent research note.

In a conference call to analysts during the previous earnings announcement, Air Canada's chief financial officer Mike Rousseau said financing through the EETC market "would probably be the preferred option."

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About the Author

Guy Dixon is a feature writer for The Globe and Mail. More


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